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Saturday, 02 June 2018 00:00
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Delhi high court rightly upholds Cairn's contract with govt

 

The Delhi High Court has done well to uphold Cairn India’s (now part of Vedanta Limited) request to the government to extend its Rajasthan production sharing contract (PSC) for another 10 years and, in the process, has quashed the government’s attempt to arm-twist Cairn into accepting a new profit-sharing regime. While Cairn already gives the government (including ONGC) 60-70% of its revenues, the new policy allowed the extension in return for a 10 percentage point hike in the revenues the government got.

While doing so, the judgment says “the New Policy cannot be used to repudiate the plain terms of the contract to the detriment of the petitioners”. It further adds that “the refusal by the respondents to extend the tenure is both arbitrary and unfair; hence, violative of Article 14 of the Constitution”. The facts are quite straight-forward. Cairn found a lot of oil in its Rajasthan oil-fields—it has invested over Rs 30,000 crore in them so far—and asked the government to extend its lease period so that it could extract the oil/gas.

Given the government’s plans to reduce India’s import dependency on oil/gas, you would think the government would have agreed immediately. Strangely, the government did not agree to this, and instead, in the meanwhile, came up with the new policy that allowed an automatic extension in return for a higher revenue-share.

Needless to say, Cairn went to court, but the government tried to arm-twist it into agreeing to the new policy’s terms. Indeed, as the court has pointed out, “the execution of the PSC occurred prior to formulation of the New Policy. The New Policy was firmed up and notified during the pendency of the writ petition”.

Apart from the fact that the judgment is a big relief for Cairn that no longer has to share more of its revenues with the government, it is also an important check on the government’s abuse of power. In several cases, even though the government has a legally binding contract, its view has been that ‘policy’ trumps a ‘contract’.

A few weeks ago, for instance, the government tried to change the rules of the PSC by telling oil firms that even if they invested more, the government’s revenue share had to remain constant—normally, when firms invest more, as per the PSC, the government’s share usually falls.

When a lot of criticism forced the government to roll this back, the oilcos were told that their cost-recovery would be on the basis of the PSCs and, if you please, “extant government policy”! What this judgment does is to ensure that “extant government policy” is not used to override a contract. It remains to be seen whether the government respects the arguments made by the judgment or whether it chooses to go in appeal.

 

 

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